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Balanced-Budget Requirements Are a Tool for Keeping Government Limited

Summary:
Here’s another letter to John Tamny on the ill-consequences of deficit financing: John: The fact that you’re so astute about so many issues only intensifies my mystification at your continuing blindness to the dangers that lurk in deficit financing of government expenditures. In your latest essay you again accuse those of us who oppose deficit financing of “the folly of putting the false notion of a ‘balanced budget’ on a pedestal.” You add that “[i]t has nothing to do with limited government.” On the contrary, advocacy of keeping annual government budgets balanced has nothing to do with fetishizing some accounting outcome; this advocacy has everything to do with keeping government limited. Deficit financing allows today’s citizens-taxpayers to push the costs of today’s government

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Here’s another letter to John Tamny on the ill-consequences of deficit financing:

John:

The fact that you’re so astute about so many issues only intensifies my mystification at your continuing blindness to the dangers that lurk in deficit financing of government expenditures.

In your latest essay you again accuse those of us who oppose deficit financing of “the folly of putting the false notion of a ‘balanced budget’ on a pedestal.” You add that “[i]t has nothing to do with limited government.”

On the contrary, advocacy of keeping annual government budgets balanced has nothing to do with fetishizing some accounting outcome; this advocacy has everything to do with keeping government limited.

Deficit financing allows today’s citizens-taxpayers to push the costs of today’s government activities onto future generations. Deficit financing thus enables today’s citizens-taxpayers to live at the expense of others. And people able to live at the expense of others will live excessively expensively. Access to deficit financing loosens the limits on government growth. Therefore, a balanced-budget requirement would indeed limit the growth of government.

You deny that deficit financing imposes costs on future generations. To reach this mistaken conclusion you’re misled by the correct fact that all resources used by government today, regardless of how government finances their acquisition, are indeed drawn away today from other possible current uses. But you wrongly believe that this reality means that we budget hawks are mistaken to point out that the costs of deficit-financed projects are paid, not by today’s citizens-taxpayers, but by tomorrow’s citizens-taxpayers.

To see your error, suppose that you borrow from a bank $30,000 today to buy a car. You therefore do not buy this car out of your current income or savings. The $30,000 comes from the bank. But clearly the party who pays for your car is not the bank; the party who pays for your car is the future you.

The same logic holds with government borrowing, but with one huge twist. Just as the bank does not pay for your car, government’s creditors today do not pay for the projects that their loans enable government to undertake. Those projects are paid for by whoever is responsible for repaying the loans – namely, citizens-taxpayers in the future. (I’m vain enough to brag that Randy Holcombe and I explain this reality with some clarity in chapter two of our new book.)

The huge twist is this: When you buy a car with borrowed funds, you – the same individual who borrows the funds – are the individual responsible for repaying them. So you borrow and spend prudently. But with deficit financing by government, the individuals who borrow the funds (that is, today’s citizens-taxpayers and their political representatives) are not the same individuals who are responsible for repaying them. That responsibility falls on other people; it falls on future citizens-taxpayers, many of whom aren’t yet born. Therefore, access to deficit financing gives today’s citizens-taxpayers (and their political representatives) freedom to spend more lavishly than they would were they required to pay for all government projects out of current taxes.

Access to deficit financing fuels government growth. You cannot oppose the growth of government and simultaneously insist that the means of financing government’s activities is inconsequential.

Sincerely,
Don

Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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